Corporate partner Jim Birge and associate Jerome Borden coauthored an article for Law360 that raises some considerations for buyers in negotiating indemnification escrows and earnouts in mergers and acquisitions (M&A) deals in a high-inflation market.
The authors note that in a highly inflationary environment, the highly negotiated allocation of risk relating to the indemnification escrow is undermined as the purchasing power of those escrowed dollars is reduced by inflation. Birge and Borden also discuss earnouts, a form of deferred consideration used in M&A transactions that may also be affected by high inflation.
Buyers should consider whether their metrics reflect the actual financial performance of the businesses and not just the effects of high inflation, Birge and Borden explain. Furthermore, the authors address how a buyer will typically resist any restriction or obligation regarding the conduct of the acquired business after closing. Sellers, however, want to include obligations to ensure that buyers maximize their earnout payments.
In conclusion, the authors emphasize that current highly inflationary pressures could have material impacts even in those relatively short-term periods, and they encourage buyers to consider what those effects could mean for post-closing amounts in M&A transactions.